Option ARMs offering flexible payment plans

Hi Christina
Welcome to the forums.

Option ARMs are adjustable rate mortgages having flexible payment options like the interest-only payment, fully amortizing 30-year payment, fully amortizing 15 year payment and the minimum payment plans. You are free to choose any payment option each month depending on how much you can pay for that installment.

The initial starting rate is low; hence, you can make lower monthly payments and use the extra cash towards other expenses. The initial interest rate on these loans is valid for only the first month. But the rate keeps changing on a monthly basis after the first month. However, this is not the case with the minimum payment option in which the interest rate is adjusted annually and has a fixed value for the whole year.

Hope these details will help you.

Regards,
Jessica.

Hi Christina

Here are some more facts on Option ARMs.

The interest rates on most option ARMs are based on any of the three indexes: the 11th District Cost of Funds Index (COFI), 12-month moving Treasury Average (MTA) and the 1 month London Interbank Offered Rate. The COFI index fluctuates smoothly compared to the other indexes. The 1 month Libor changes quite frequently, say within a month or two.

Hope you find this information useful.

Regards,
Caron.

Hi,

Just wanted to add something about the ARM

ARM benefits include:

• Down payment is less due to lower beginning interest rate, usually about 2 percentage points below the fixed rate.
  
• Can easily be qualified for a higher loan amount due to lower initial interest rate.
  
• Interest also reduces if the interest rate drops over time.
  
• Interest rate caps limit the maximum interest payment allowed for the loan.
  

ARM disadvantages include:

• The initial lower interest rate and monthly payments which are associated with it are temporary and apply to the initial fixed rate period only. The interest rate will adjust itself periodically with respect to an index rate, after the initial period is over.
  
• As the interest rate rises over the period of time, interest payments goes higher.
  

[edited by Sam, made changes in the format. Thanks]

Hi Fathahe

Thanks for providing us with such useful information. We look forward to your participation in the forums in days to come. :D

Thanks,
Jessica.

I have heard these Option ARMs really work. I want to know more about it, mainly the payment options. Is it interest-only or repayment mortgage?

Hi Patrick
Welcome to the forums.

The Options ARMs can be both interest-only as well as repayment mortgages. The various payment options are listed below.

• Minimum Payment
  This repayment option allows you to make fixed monthly payments at a fixed rate of interest for a year. At the end of the year, the payment changes annually, but the change is limited to a certain amount due to a payment cap being applied on the loan. In case you fail to pay off the required interest and principal for the first year, then the extra payments will be added to your loan balance.



• Interest-Only Payment
  The interest-only payment allows you to avoid deferred interest when the minimum payment is not sufficient to pay off the interest. This option is not available when the interest-only payment is less than the minimum payments. The interest-only option allows you to pay only the interest for an initial period after which he pays both interest as well as principal. The interest-only payment changes every month with variation in the ARM index that determines your indexed rate.
  

Therefore, the Option ARM is both an interest-only as well as repayment mortgage.

Hope this information will be useful.

Regards,
Caron.

Hi,

Just got some information on Option ARM. Apart from the payment options that Caron mentions, there are two more ways of repaying the mortgage loan.

• Fully amortizing 30-Year Payment:
  With this option, you pay both the principal and interest as per schedule. Your payment is calculated each month based on the previous month's fully indexed rate, loan balance and remaining loan period.



• Fully amortizing 15 year payment:
  This option allows you to make comparatively higher monthly payments than the 30 year payment option. It helps you to repay the loan much faster than the 30 year payment option and thereby save more than half the interest payments on a 30 year loan.
  

Hope this helps the community.

Thanks,
Jerry.

Hi Jerry,
Welcome back to our forums.

You have indeed provided some useful information. This will surely benefit our community. Thanks for your concern.

Regards,
Jessica.

People should note that while the minimum payment is low, it is putting you into negative amoritization. In other words, if you have a balance of $100,000 and elect to do the minimum payment at the 1 or 3% they offer, your balance now becomes, say, $100,300.

Kevin

Hi friends,

I can suggest an option to get rid off the negative amortization resulting from minimum payment option. Option ARMs offer the option of recasting or recalculating your loan amount. The recasting is done after every 5 years. The recalculation depends on the loan balance, the remaining loan period and the fully indexed rate.

The lender decides upon a certain amount as the new minimum payment which will amortize the loan over the remaining loan term. The payment cap here is not applied during the recast period. The cap only becomes effective when the recast period is over and it continues to remain so till the next time when the loan is recast.

Thanks,
Wickham

Hi,

I have a five yrs. fixed interest only loan at a rate of 6.025%. Should i try to refinance and get a flexible loan?


Thanks,
Paulo

paulo, you definitely ought to look into refinancing. a "five yrs. fixed interest only loan" is a variable rate product.